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GMGruman writes "The high-speed trading exchanges that conduct the business of buying and selling stocks and mutual funds are so fast that hackers can introduce delays of a few microseconds completely unnoticed by today's network monitoring technology — and manipulate prices in the process to reap millions of dollars to the detriment of everyone else, InfoWorld's Bill Snyder reports. This kind of activity creates new reason to distrust Wall Street and shows how the computer networks we all rely on for conducting business and moving information are ripe for undetectable hacking."

Don't confuse good government regulations with bad. No regulations are completely voluntary, if they were, we would not need to even mention them. No, the reason we have them is precisely because not everyone does the right thing voluntarily. All effective regulations come with consequences for breaking them. There is no fundamental difference between a law and a regulation. Breaking a law amounts to the initiation of force against the parties that enacted the law. Responding to a threat with force is not immoral. The idea that all government regulations are bad is simply an argument put forth by those who do not want to be held responsible for the consequences of their actions.

Don't confuse good government regulations with bad. No regulations are completely voluntary, if they were, we would not need to even mention them. No, the reason we have them is precisely because not everyone does the Same thing voluntarily. All effective regulations come with consequences for breaking them. There is no fundamental difference between a law and a regulation. Breaking a law amounts to the initiation of force against the parties that enacted the law. Responding to a threat with force is not immoral. The idea that all government regulations are bad is simply an argument put forth by those who do not want to be held responsible for the consequences of their actions.

If half of all people pissed in the pool, would that make it ok? What percentage of financial advisors have to embezzle their customers' profits for it to become ok for all of them to do it? If it only matters to you that everyone does the same thing, then why not allow all US companies to dump their wastes straight into the water table? It would boost the economy (until endemic cancer and birth defects crippled it).

Interesting take on my fixing of the article to read "same", as a regulation or law forces conformity. Ironic that you described practices in China, a communist state where conformity is law, present practicing the very action you espouse as evil. The dumping of industrial waste into the waterways, to such an extent that a freshwater species of Dolphin in now extinct [wikipedia.org].

The point here is not everything should, or can be enforced, regulated or legislated. Our government was designed to act in a balance of t

It's interesting that the people most opposed to "government regulation" are typically strongly in favor of government regulation when it comes to recreational drugs or small businesses that might usurp their market.

Practically everyone is (for good reason) in favor of government regulating violence and theft.

The "all government regulations are bad" crowd, of course, wants violence to remain regulated so they won't have individuals holding them responsible for their actions either.

You do realize that a big buyer for massive computers is the "investment" "industry" so the can perform faster and faster trades-- apparently to the point where the network transaction speed is enough to screw up their scheme. The solution will be to update the computers to work around such problems and probably firms developing machines to mess with the others-- a cyberwar game going on in addition to the existing super computer games going on already...

Your analogy to Wall St. as a Casino is correct. There are two sides. The speculator and the investor. The speculator is like the customer that has a plan on how they are going to enter the casino and win. They have betting patterns and card counting and other tricks. Sometimes it works. Sometimes it works for a long time. Eventually the odds catch up to most people and they lose. The Casino itself is the investor. They are willing to deal with short term gains and losses with the knowledge that overall their investment will return small steady gains.
It's the same with the stock market. Over the long term index funds do go up because companies become more valuable due to growth and inflation. If you day trade or even buy individual stocks you are speculating that you can beat the house. It is only for speculators that these market manipulations cause problems. If you are a long term investor like the Casino you don't even notice the small ups and downs.

What do you suppose happens if they refuse to comply with federal regulations? No, it won't be the national guard, but if they resisted enough it would eventually be the US Army knocking down their doors.

The army is just the ultimate backing force for the threat. I can assure you they would be called in after the local FBI office was wiped out (as the FBI would get called in after the local police were wiped out). The fact that the army hasn't had to get involved since the civil war speaks to the success of our system. Yes, actual violence in regulation is rare (though, for example, Madoff was actually physically arrested). Obviously that's the point of having a civilized society, keep the actual violen

and one more thing, its unconstitutional for the executive branch to order the military to go into a civilian USA city; the exception is bases, but that's federal property.

Note: Posse Comitatus applies only until the president determines that there is a state of insurrection occurring in that location. Refusal to obey the federal government is the definition of an insurrection;) And you have to admit, turning out the army against wall street is unlikely to be a politically unpopular move;)

Why not every 30? That should be enough time for a HUMAN to decide if they want to buy or sell something. It seems that this lightning fast trading works great and they're happy if they're making money. If something cascades into failure (like it did earlier last year, or was it '09?) then they just say 'oops, do over'. Imagine you were cashing out your 401k during the 'accidental' crash last year. One second stuff is at 1000, the next it's at 300. In the time it took for electrons to travel from your broker to the market.

The worth of a company what a stock is supposed to buy you into, doesn't change even from minute to minute.

I mean, they wouldn't make as much, but it'd be fair to the common person. (So it'll never happen).-OR, the other suggestion that I heard suggested would be to tax trades inversely proportional to how long they're held.1 minute: 90%1 hour: 80%........20 years: 5%40 years: 1% (people that actually it as investment).

Why not make it every hour or even every day - that gives people time to think before each trade and means that you get better luck from algorithms that predict the long-term viability of a company, which biases investment towards companies that have a long-term future. Taxing based on the amount of time the stock is held for sounds great. I'd love to see very high tax rates for people who don't actually create anything.

Imagine you were cashing out your 401k during the 'accidental' crash last year. One second stuff is at 1000, the next it's at 300.

I could be mis-reading your comment...but if you are worried about Joe Average selling off his shares in stock FOO while they are at 1000 a share, and the trade executing moments later when it drops to 300 a share..that's impossible unless Joe Average is very foolish.

When you execute any trade involving significant cash, you use limit orders to protect yourself against exactly that. If stock FOO is $5.50 a share and I want to sell 1000 shares, I place a limit order to sell at $5.50. This means if there is a bid for 7 shares at $5.55, $5.53 or anything $5.50 or greater I will sell at *that* price. But no shares will be sold below $5.50, that portion of my order will remain 'unfulfilled'.

If I mis-read what you meant in your comment...my apologies ahead of time. Otherwise I hope that sheds some light on how trading happens between the orders being placed and the securities changing hands.

I've been an avid follower of/. for some time now. I've gained a lot of insight from reader responses, which are generally well thought-out, mature, and reasonable. On the topic of market microstructure, however, I feel/. falls woefully short. I cringe when I read comments that sound like something from Zero Hedge.

I work in HFT. I make markets. Obviously, there is an incentive for me to talk about all the good things HFT brings to the world. However, I also believe that we serve a function in the market. Perhaps not vital, but still a service nonetheless.

What do market makers add to the market? They're willing to stand on the other side of your trade. They serve a vital function to the market and we can trace them back to the specialist days on the floor. Let's all agree to start from there.

What do HFTs add to the market? Now this is where you have a large divide in opinion, and rightly so. Some HFT firms will engage in predatory behavior that is unfortunate, including quote stuffing and price manipulation. I am not writing to absolve all the bad things that many HFT firms do. However, in my view, ideally, HFT market makers add these factors: immediacy and continuity.

As an investor, you can go up to a trading terminal at any time in the day and someone (most likely an HFT firm) will be there to take the other side. That is immediacy. You also have access to price discovery that is happening every fraction of a second. That is continuity. These are ideal situations, and not every HFT adds these values. Firms that only remove liquidity are often not providing immediacy. Firms that manipulate prices are usually not providing continuity.

If you think, "HFT's will run at the sign of chaos!" I agree with you. The better, smarter, and faster firms will continue to stay in the market, but only up to a certain point. Why should anyone stand in the way when a big institution sells 75,000 ES contracts? We trade and provide liquidity so long as it's profitable. If you have a problem with that, you have a problem with capitalism. How do you possibly incentivize participants to absorb tail-end risk?

If you think, "But investors don't care about 30 microseconds!" I agree with you. The short reaction times are there so that we can manage risk. It indirectly adds value to the investor because it allows us to manage risk better, which allows us to provide really tight markets. Think about it. We're standing there for anyone in the world to trade against all the time. Adverse selection is the name of the game. Back in the specialist days, spreads were sometimes in dollars. Now they are in pennies, and in many liquid stocks, exactly a penny. I assure you -- if we ever move to a system that taxes each trade or throttles latencies, you will see spreads widen out immensely because it's harder to manage risk. If you impose a limit on the minimum life of a quote, you will see spreads widen because there's risk in standing in the middle of the highway for too long.

If you think, "But company values don't change every 30 microseconds!" I agree with you again. It's the possibility that they could change that necessitates high reaction speeds. Company valuations are stable -- on average. But once in a while, some information is leaked that damages the company's reputation or some big institution decides to buy a ton, and you're left with a huge position that's going against you. Should we stand there and absorb that flow even when it's not profitable?

The last point is probably the biggest factor in a gating system where trades only take effect every N seconds. You can only update your position every N seconds, so as a market maker, you're essentially putting out a lot more risk. Some firms will be smart about risk management and be able to provide tighter spreads and make money for themselves. Some firms will not and they will go out of business.

A well-designed gating system would eliminate the arms race -- simply having a _blind_ auction every second (or every 5 seconds) without time priority, but with price-size priority instead would eliminate it. Working in a large trading outfit, I don't know anybody, whether sell-side or buy side, who takes conscious split second decisions on value. So any sub-second activity is either noise or computerized arbitrage - none of which will be missed if it only happens every second.

What does it mean to "make markets"? Stock markets have been around for a hundred years without high frequency trading, and they worked just fine.

Why do we need middlemen to quickly buy and sell stocks? They only are willing to do so if they can make money. So if I put out a sell order and want to sell my stocks for at least $5, and there is a HFT firm in the market that buys my stock for $5 one hundredth of a second later, then a few seco

This suggests that without HFTs the market would not have immediacy and continuity, which is nonsense. Market makers were providing sufficient immediacy and continuity before HFT was common, and would continue to do so if HFT were engineered out of the system.

You could argue that spreads are lower because of HFT, but you really haven't made that case, which is tricky. Spreads have come down in the last decade, but I'd expect in a market dominated by HFT for them to be far smaller than they are. This actu

That does sound even better, though shaving close to that fixed time still leads to less abuse. During that whole 5 seconds, you have no feedback on what the rest of the market is going to do. Plus, you've opened up almost-high-frequency trading to the entire world, rather than just the local datacenter.

Setting a fixed time moves the goal to whomever can shave their systems closest to that fixed time.

There would only be to reasons for going that way. One reason would be to be able to complete some heavier calculations before the deadline. But if that was the reason then more processing power and faster algorithms is a much more reliable way to achieve the same than playing the latency games.

The other (more likely) reason for wanting to get close to the deadline is to take benefit of additional informatio

That's not necessary -- you can just remove the margin to be faster altogether. Just collect all the bids placed before the fixed point, without telling anyone what the other bids are. (i.e., everyone sends in their supply/demand curve for a given security) Then, the computer could look at just those bids (any further bids would apply to the *next* fixed time), resolve the trades by an algorithm, and spit out the results when it's done.

If the time is truly quantized such that nobody can see any of the orders until they settle at the end of the quantum and the orders that happened within are randomly matched (such that they all truly happened at the same virtual time) the advantage goes away.

... moving from continuous trading to iterated auctions merely replaces one problem by another: While now you want to act first, in the auction, you want to act last. In any case, he who gets to know the bids of the others sooner and can place his own bids faster will have an advantage. The only solution would be to keep the bids secret - but who do you want to entrust with this job? And how would you keep the bids secret before they enter the system? After all, your bank or online broker has to check your

Closed bids. Nobody sees the bids for the interval until it's over and everything settles. One way is a standardized data structure. To place the bid, you submit a sha256 hash of the structured data to prove you made it. Then the quantum ends and you send in the matching structured data.

I work in this business as well, this article is pure nonsense. I honestly don't know what the fuck this guy is talking about. Artificial delays would be picked up on immediately, no matter how brief. And it's not like this shit is trading over the internet, all endpoints are known, there is no anonymity, if someone tried this shit they'd be in jail by the end of the day.

You never noticed when I changed the percentage of cents from everyone's salary to go into my secret account. The trick to avoid passwords is typing in "override all security". Works every time. My old mentor Gus Gorman filled me in. He's dead now, so I'm not ratting him out.

Just to be clear here, we are talking about nanoseconds; one of which is how long it takes light to travel 30cm. So, let us posit the existence of equipment that can cope with some number of trades over a span of nanoseconds in a single day (86 trillion). This is simply a smooth line to the average person, but we have money on our side. Every variable is controlled, and all equipment has a quality that would make the SI kilogram standard look like a dirty rock I dug up yesterday. In fact, screw network link

While not directly for Wall Street, I've been at a couple of related industries (super five 9 HA hardware maker and a free stock website) and I'll wholeheartedly agree; the end results will get noticed faster than you can login to Ameritrade. And what is up with the completely false term "undetectable hacking?" That's got to be the stupidest term I've heard this century. There is no such thing as undetectable hacking. Shame on the coiner's lack of knowledge in computer security and forensics. FAIL.

That might let you attack investment banks and hedge funds who are communicating with their brokers over the Internet or VPNs like BT Radianz, but in that situation, it's nothing more than a regular Internet DOS attack. It won't affect real HF traders. If you're HF, your gear is colocated with the broker or exchange, and you use point-to-point links to control it from your office. Attacks would be noticed and attackers identified, as it would have to be an inside job.

You're an idiot and you don't know what market making is. The prices options trade at are so close to the theoretical fair price that there is very little money to be made on each trade - often only cents. To keep the company in the black while paying a bunch of talented developers and network engineers, you have to make as many trades as possible. The reason for cutting down latency is so that we can snap up that 80c before anyone else.

Maybe you're not thinking about market making - maybe you're thinking about those clowns trying to game each others' algos on NASDAQ. The guys who place orders and delete them faster than they could ever trade just to see how the other guys' algos react, and have "geniuses" talking crap about how foolproof their theory of predicting stock prices falling is, and basically treat trading as a black art. They serve no useful purpose, and just create extra noise in the data feeds that need to be processed. I don't think they really do a great deal of harm most of the time - most of the money they make and lose is just being passed around between each other. They're all a big circle jerk.

You can't lump all HF traders together. (And for the record, I'm a geek: I design, develop and support the systems; I don't sit on the dest trading.)

Amen. You're in minority here. With me. I do what you do, and the debate in the public sphere is unbelievably uninformed.

BTW, it's not just option hedging that requires HFT. There's loads of different things to do, and some of them look silly from the outside. I've seen quite a variety of algos, all trying to do different things, on different timescales, on different markets. Of course the media tend to focus on what they've heard of, stocks.

Once a company publicly issues shares and sells them into the stock market. Couldn't they theoretically, now that they have the money more or less just ignore the share and let the traders gamble with each other over press releases and quarterly reports?Once a share is in the wild, it's value might be measured based on the performance of the company that issued it, but there is in fact no REAL value to the share, it's strictly perceived value. It's not like you can use it as legal tender. You'd have to find

Millions are made by that "black art" of yours, but you don't know, and how should you.

Yeah, and then they lose it again, because they're clowns - look at the current state of Timber Hill.

I think grandparent's gripe is with this: what's the purpose of such a HF company? Why do we allow them to leech away the money that could go to something actually useful?

Keeps the price fairer - if market makers weren't all clamouring for your trade, it might cost you $5 beyond the fair price instead of the $1 you pay because we're all trying to undercut each other. It's competition in action.

WTF? You don't know the difference between hedge funds and market makers? I know the media likes to beat up on the finance industry as a whole, but not all are alike. Fund managers are often no better than diviners or soothsayers. They think they have some special, magical insight, but most of the time you'd do just as well randomly choosing stocks. That has nothing to do with what I do. I help keep derivative prices fair and liquid.

How is this really any different from bread-and-butter high-frequency trading? Firms spend millions to put their servers physically closer to the trading computers to edge out everybody else by a few milliseconds. Boo hoo, now some "hacker" almost put them back on a level playing field with almost everybody else. It's all financially meaningless, totally legal theft.

That's chump change on Wall St. Compared to the kind of stuff Goldman Sachs pulls on a regular basis, I'm not too worried about high-frequency traders getting scammed. What's very clear is that none of it has much of anything to do with actual sound investing.

High-frequency trading networks, which complete stock market transactions in microseconds, are vulnerable to manipulation by hackers who can inject tiny amounts of latency into them. By doing so, they can subtly change the course of trading and pocket profits of millions of dollars in just a few seconds, says Rony Kay, a former IBM research fellow and founder of a cPacket Networks, a Silicon Valley firm that develops chips and technologies for network monitoring and traffic analysis.

(emphasis mine)

A man who claims companies are losing millions due to network latency sells tools to monitor network latency? A reliable source, I'm sure.

"Hackers" didn't find it, and the article is like 4 paragraphs on 3 pages. It's an advert and a revenue generator for infoworld. Of course I have NoScript and other blockers, so I clicked through all 3 pages to waste their bandwidth. I suggest everyone do the same.

Yup, as anyone familiar with The Street knows, the banksters have it sewn up as the usual suspects own all the exchanges and all the clearinghouses.

Ergo, the same people who own the holding company which owns all the climate exchanges (Climate Exchange PLC) also is the same bunch who owns the InterContental Exchange (ICE) and all its subsidiaries, plus the DTCC, plus Markit Group (which prices all those thousands of categories of pesky credit derivatives [otherwise, they'd be worthless!], and ELX Futures, e

That's what we hear, anyway, whenever anyone proposes that maybe ever-higher-speed trading isn't such a great idea.

It's a load of crap, of course. Yes, liquidity is good. No, restricting trades to, say, one per second -- which is still faster than any trading ever took place during the centuries of stock trading before computer trading became common -- would not bring our economy to a screeching halt. In fact, it would probably encourage economic growth by encouraging actual investing instead of the giant casino that the stock market has become.

Of course, in a casino, the house always wins, and since in the case the house also owns the House and the Senate too, this is never going to happen. Sigh.

Liquidity IS good, and in the end, I don't see how this is doing anything but provide more of it.

If the hackers are netting themselves a bunch of money by out-trading the other high-frequency-traders... good for them. It's not my money they're taking, because I've got better places to put my money than trying to out-arbitrage the arbitrageurs. But both of them, the Evil Hackers and the White Hat Ginormous Wall Street Bank, are both making sure that when I do sell my stocks, I've always got somebody to sell it to.

The arbitrage means that maybe I'm losing.01% off the transaction. If that's Big Money in aggregate, it's still only a tiny fraction of the mount of money on the line. It's money I couldn't ever get my hands on.

If the hackers are netting themselves a bunch of money by out-trading the other high-frequency-traders... good for them. It's not my money they're taking...

That's what I thought, too -- until Fall '08 hit, and I found out that if one of the big players lose to these guys, the government bails them out (at which point it *is* my money they're taking), revealing as a sham this whole idea that the big guys nobly make risky bets. No, if you're going to be bailed out on the downside, you weren't taking a risk to begin with -- ever.

In theory, you're right -- but let's bring back the concept of "failing when you're wrong" to Wall Street before blithely dismissing the harm these guys can cause.

And seriously -- is the tiny bit of extra liquidity REALLY worth the billions these guys sink into HFT?

Liquidity IS good, and in the end, I don't see how this is doing anything but provide more of it.

It's simple, really. If they make a profit, they take money out of the system. Since the system doesn't generate money, that money is missing somewhere else. Or in other words: Someone else has to pay it. If you think that someone is the other high-speed traders, I have a bridge that you might be interested in.

There are several products on the market that are employed by the Exchanges and their large customers to track all of this.This is a marketing paper for what appears to be an interesting product.Existing vendors already capture, log, analyze (in realtime), traffic across multiple probes and provide real-time alerting along with monitoring, measurement, etc. These products are all leading edge and are changing rapidly. They've solved many problems with proprietary schemes of various sorts. Not the least of which was time synchronization at the nanosecond level.

For very simple public information, just look at latencystats.com. Keep in mind, more detailed info and analysis is going on behind the scenes.

Firstly, it's not undetectable, since you just detected it. Secondly, it doesn't affect everybody, just the HFT people. Most of us don't have much sympathy for them, so we wouldn't consider it a problem.

Scanning for this behavior is going to be challenging, as HFTers will want to detect this particular misbehavior while hiding their own misbehavior.

The reality of Wall Street ripping off the consumer is not far from reality. I work "in the industry" as well (and have, for 10 years), and I've seen and been witness to all kinds of shams and problems that Wall Street is culpable for.

Let's just leave it simply, the average investor doesn't know *anything* about investing. They don't know stocks, bonds, they don't know diversification, they don't know how to change allocations before retirement age for 401ks, etc. But the sad thing is, Wall Street doesn't either. They may know the P/E ratios of firms, the current stock price, and lots of fancy math, but the reality is that a lot of money made on Wall Street isn't in active trading, it's in knowing their customers and playing on that information, and topping it all off with fees. For example, Goldman advises its customers, and the clients lose out, and Goldman wins -- See here. This isn't uncommon.

The simplest secret about Wall Street is that the average investor can forgo using a trading firm, and just invest in an index fund instead (like the S&P). Those funds have very low fees, and require zero understanding about Wall Street. They go up as the economy gets better, they go down as it doesn't. And less than 20% of firms out there can *BEAT* the S&P, meaning that 80% actually do worse. In addition, they charge higher fees. So if you throw your money into the index fund, you don't have to know anything, and you do just as well as 80%+ of the firms out there, and keep the fees they'd charge you to just meet the same ROR in your pocket.

Sadly, you'll never hear about this on the Street, because it would ruin their whole scam. The only thing you need to know is that 5-10 years before retirement age, pull out of indexes and put into guaranteed products so you don't get thrashed on your retirement day, and you'll be a happy camper.

With the amount of influence Wall Street has in our government, in our economy, it's about due time we start getting them the hell out of the way so that we can do better as a country. I know it sounds cheesy, but it's true.

The article is indeed bullshit and some of the claims violate the very fundamental laws of physics the author cite. Take for example "...it typically takes about 50 milliseconds to send a message from New York to London. Placing a server in between the two could cut the speed of communication in half, they said, which may be enough time to take advantage of some momentary pricing discrepancy....". How do you accomplish this. By the time you get trading data to server halfway and create a trade and send the

When everyone buys index funds, the index managers have huge leverage to manipulate. The high freq traders have more leverage to manipulate the fund traders. The market as a whole becomes more correlated. There's nothing wrong with index investing, but if everyone does a lot of index investing, at some point you are looking into a pricing hall of mirrors instead of a working market and it takes fewer and smaller non-conforming players get enough leverage to tilt the whole applecart. We already see the effects of this from the studies that show that the markets are now more correlated than before the popularity of the index funds.

If you want to limit the effects of rogue players, don't just ignore them. Prohibit their abuses. The 5-second trade granularity mentioned above seems like a good start.

The simplest secret about Wall Street is that the average investor can forgo using a trading firm, and just invest in an index fund instead (like the S&P). Those funds have very low fees, and require zero understanding about Wall Street. They go up as the economy gets better, they go down as it doesn't. And less than 20% of firms out there can *BEAT* the S&P, meaning that 80% actually do worse. In addition, they charge higher fees. So if you throw your money into the index fund, you don't have to kn

Nor is it exactly new. After the last strange dip in the stock exchange a lot of research was done into this, and it basically comes down to inserting bullshit data into the stream so that competitors have to process the data while the injector does not.

Back in my day Wall Streeters got money the old fashioned way, they bribed politicians to funnel taxpayer money into the firms while simultaneously getting the politicians to look the other way when banks committed crimes....whats that you say? They are still doing that? Well I guess somethings never change.

Now get off my lawn.....Whats that you say? The bank has illegally foreclosed on my property despite not actually being in debt to them and it's legally THEIR lawn now, and I'M the one that has to get off of it? Well, it's a good thing I have support from my local polit....ah fuck it.

His conspiracy one is called front-running, and was one of the first things banned in the markets. But yes, if we can't see a trader's hands moving the shares and the dollars, we have no way to know whose trades he's prioritizing. Except that we do, because it's all logged and traceable to every hand in the chain from investor to specialist.

His conspiracy two is cute, but the truth is that there's no way the State Department could hide the general nature of foreign relations behind a cover sheet. It's th

The story is organic fertilizer. If anything, the problem isn't hackers... the market is now an autonomous exercise in artificial intelligence, and for the most part, beyond human understanding. Don't get me wrong, we can understand parts, and even how some of those parts interact, we simply have no way of comprehending the aggregate and its immense degree of complexity. We have systems milking the tiniest fluctuations in the system sifting out whispers of profit in a hurricane of transactional data. These

Except that the financial IT systems are some of the most well funded ones in the world, and are often more sophisticated than anything actual IT companies make. When I worked in the financial industry, it wasn't uncommon for us to buy a multi-million dollar system from a big name IT, look at it, and go "Hrm....we could do better". We'd do something better, then sell the rights back to the highest bidder, and pay them to maintain it for us.